Arrest In Net Stock Fraud Case

In one of the biggest Internet hoaxes involving a public company, the FBI arrested a PairGain Technolgies employee Thursday on suspicion of orchestrating a phony online news report in a bid to drive up the stock of his firm.

Gary Dale Hoke was charged with one count of securities fraud by federal prosecutors in Southern California. PairGain is based in Tustin, a suburban Los Angeles community, but he was arraigned in Raleigh, N.C., where he has been working for the telecommunications company.

Hoke, a mid-level engineer for two years, had been suspended since Tuesday after his superiors learned he was under investigation, according to Charles McBrayer, a spokesman for PairGain. McBrayer said Hoke had "a minor amount" of unexercised stock options in the company.

On April 7, shares of PairGain soared 31 percent after a bogus report appeared on the Internet saying the company was being bought by Israel's ECI Telecom Ltd.

The U.S. Attorney charged that Hoke, using his computer at work, posted a fraudulent message on a Yahoo message board and fabricated a bogus Web page that appeared to unsuspecting readers as a bona fide Bloomberg News report about the supposed transaction.

Hoke appeared in court in Raleigh, N.C., and was released on $50,000 bond after agreeing to appear in federal court in Los Angeles.

An FBI spokesman said the FBI and the Securities and Exchange Commission worked together on the case, in which investigators pieced together data gleaned from Web servers in the San Francisco Bay Area, where Yahoo is based.

Written By Steve Gelsi & William L. Watts, CBS MarketWatch